“2Q20 message from the money sector”

Part 1 – the euro area narrative

The key chart

Headline figures mask a more nuanced message from the monthly flow data
Source: ECB; CMMP analysis

The key message

The “2Q20 message from the money sector” is simple: uncertainty in the euro area has peaked but remains elevated still.

  • Demand for overnight deposits remains the key driver of M3 growth
  • Above-trend NFC credit demand and resilient HH mortgage demand is offsetting weakness in consumer credit
  • Monthly flows into overnight deposits (and uncertainty) peaked in March at 5x 2019 average flows but remain 1.3x 2019 average flows
  • HHs have stopped paying down consumer credit and mortgage demand has remained resilient throughout the pandemic
  • The NFC “dash for cash” has also peaked and the monthly flow of corporate borrowing fell below the 2019 average in June
  • Despite negative real rates, almost €10trillion continues to sit in cash and overnight deposits
  • The key question – how much of this is “forced” versus “precautionary” savings – remains unanswered for now.

Six charts that matter

The headlines from the ECB’s money supply data for June 2020 suggest little change to the “message from the money sector” narrative (see key chart above). Growth in broad money (M3) rose to 9.2% YoY from 8.9% in May, the fastest rate of growth since July 2008. Narrow money (M1) grew 12.6% YoY from 12.5% in May and overnight deposits grew 13.1% YoY from 13.0% in May. M1 and overnight deposits contributed 8.5ppt and 7.6ppt to the overall M3 growth of 9.2% respectively. In short, households (HHs) and corporates (NFCs) continue to demonstrate a high preference for liquid assets despite negative real returns, which reflects high levels of uncertainty. No surprises here.

HH and NFC loans as a counterpart to M3 (% YoY)
Source: ECB; CMMP analysis

Looking at the counterparts to broad money, credit to the private sector contributed 5.1ppt to M3 growth down from 5.3ppt in May. HH lending stood at 3.0% YoY, flat on the month, while growth in NFC lending fell to 7.1% YoY from 7.3% in May. As before, above-trend NFC credit and resilient HH mortgage demand (4.1% YoY) offset the lack of growth in consumer credit (flat, YoY)

Monthly flows of overnight deposits
Source: ECB; CMMP analysis

Behind the headlines, the monthly flow data presents a more nuanced picture. Monthly flows into overnight deposits peaked at €250bn in March (5x the 2019 average flow) and have fallen back to €63bn in June (1.3x the 2019 average flow).

HH “uncertainty” peaked one month before NFC “uncertainty” – but both remain elevated
Source: ECB; CMMP analysis

HH deposit flow peaked at €80bn in April and has fallen to €50bn in June. NFC deposit flow peaked a month later in May at €112bn and has fallen back even faster to €42bn. In both cases, however, the latest monthly flow is still 1.2x the respective 2019 averages.

HH no longer paying down consumer credit
Source: ECB; CMMP analysis

After three months of negative flows, EA HHs have stopped paying down credit for consumption. They borrowed €1bn in June after negative flows of €-12bn, €-14bn and €-2bn in March, April and May respectively.

Mortgage demand remains resilient
Source: ECB; CMMP analysis

HHs also borrowed €10bn in June to purchase houses, down from €20bn in May. The smoothed 3m MVA of monthly mortgage flows has been trending between €10bn and €20bn for a sustained period reflecting resilient demand since mid-2017.

Passed the peak “dash for cash”
Source: ECB; CMMP analysis

The “dash for cash” from NFCs appears to have peaked at €121bn flow in March 2020. Since then, the monthly flow has declined to €72bn (April) and €50bn (May) to €8bn (June), below the 2019 average monthly flow of €11bn.  

Please note that the summary comments and graphs above are extracts from more detailed analysis that is available separately.